With a strong presence in the oil and gas industry, starting new wells and profiting from existing ones, and with a large purse full of money, SandRidge Energy (SD) is set to grow by leaps and bounds. The company is on a steady course of progression, building a business that will make investors happy for years to come. I believe SandRidge to be a smart investment based on the company's history of building up capital for acquiring productive plays and for its expansive inventory of drilling locations. Currently, the company has 42 rigs operating that include five drilling saltwater disposal wells. During the first quarter of 2012, SandRidge averaged 36 operating rigs and drilled 250 wells. A total of 240 gross (213 net) operated wells were completed and brought on production during the first quarter of 2012. That aggressiveness alone makes SandRidge a winner, but thankfully, there is more to this company.
While some may lean toward the big-cap oil producers that are also large producers of natural gas, such as Exxon Mobil (XOM), Chevron (CVX), and Anadarko Petroleum (APC), SandRidge is a little more nimble. The company can bend more with the times and at a faster pace than the big dogs. Until gas prices took a dive, the company was formally focused on natural gas development in the East Texas Basin and West Texas. SandRidge recently diversified its production base to oil through acquisitions in the Permian Basin and leases in the mid-Continent area, focusing on the Mississippian formation through its system of horizontal drilling.
When SandRidge acquired Dynamic Offshore Resources (finalized April 17th), it gave the company more proven reserves and opened up shallower, or less than 300 feet depth oil leases and wells in the Gulf of Mexico. SandRidge is operating only one rig in the Gulf of Mexico, but plans to drill 13 wells and participate in the drilling of two non-operated wells during the remainder of 2012. Dynamic's year-end 2011 proved reserves are 62.5 MMboe and are valued at approximately $1.9 billion. During the purchase, CEO and Chairman Tom L. Ward stated, "As larger and larger companies want to come onshore and compete, service costs are rising and they're moving away from a traditional place that was the cheapest and that's the Gulf of Mexico. We look at this as a very large opportunity to be contrarian but also for value."
With its Mississippian Play, SandRidge is growing. Currently, the company has 29 rigs operating in the play, of which five are drilling horizontal producer wells in Kansas, 19 are drilling horizontal producer wells in Oklahoma, and five are drilling saltwater disposal wells. The company plans to operate an average of 26 horizontal rigs and drill approximately 380 horizontal wells in the Mississippian play this year. It has an inventory of approximately 8,000 drilling locations on approximately 1.7 million net acres. In the first quarter of 2012, the company drilled 68 horizontal wells there with 55 in Oklahoma and 13 in Kansas. Of the 640 horizontal wells that have been drilled in the Mississippian play, 297 were drilled by SandRidge. The company has its act together in this play having had its foot in the door long before other operators staked a position there. Assuming crude oil prices of $120 per barrel, the company estimates an internal rate of return on Mississippian wells as high as 200%. If prices drop to as low as $60 per barrel, SandRidge still makes out with estimates at a 40% internal rate of return.
Additionally, SandRidge is extremely flexible. This Gumby-like trait allows the company to make moves competitors like Occidental Petroleum (OXY), Apache (APA), and ConocoPhillips (COP) cannot do. SandRidge maintains its own fleet of drilling rigs through Lariat, operating as a subsidiary of SandRidge, and has multi-year inventories of both oil and natural gas drilling locations within its core operating areas. This two-prong resource of inventories as well as its own drilling rigs allows the company to tackle projects that provide the greatest returns. The average price received for SandRidge's oil production increased 24.4%, from $66.89 per barrel during 2010 to $83.21 per barrel during the year ended December 31, 2011. The average price received for the company's natural gas production for the year ended December 31, 2011, decreased 4.9%, or $0.18 per Mcf, to $3.50 per Mcf from $3.68 per Mcf in 2010.
SandRidge's 2012 first-quarter results revealed revenue of $381.6 million, which is higher than the prior-year quarter of $312.8 million. The company had operating cash flow of $153 million compared to $102 million in first quarter 2011. Gross margin was 68.3% for the quarter, 730 basis points better than the prior-year quarter and operating margin was -38.9%, 2,750 basis points better than the prior-year quarter. Net margin was -57.2%, 3,940 basis points better than the prior-year quarter. The company reported first quarter earnings of 0.04 per share.
With a market cap of $3.6 billion and growing, SandRidge has put itself in a position for tremendous growth. The company expects to fund its planned capital expenditures budget and working capital needs for 2012 from existing cash balances, cash flows from operating activities, and proceeds from the sale of working interests in the Mississippian formation and the proposed Mississippian Trust II offering. Another deal made back in January gives SandRidge even more liquidity for future purchases. This deal made with Repsol E&P (REPYF.PK) gives Repsol E&P a 25% non-operated interest in SandRidge's Mississippian acreage in exchange for cash and a share of development costs, up to $750 million over the next few years. It is deals like these that stretches and bends the company making SandRidge even more valuable in the years to come.
Where is this stock headed in the short and long term? Based on Sandridge's strong assets and its ability to adapt to new economic conditions, I expect to see a 30% jump in stock price by next year. I believe the stock presents an excellent opportunity for long-term investors as well, though it is difficult to estimate how much higher SandRidge will be three to five years out.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.